Homeowners should always be aware of their home insurance policy and what is covered, as not all policies are created the same. Your personal belongings are generally covered under home insurance, but not always in the same way or to the same extent as you might expect.
There are two main options when it comes to covering your personal belongings under home insurance: actual cash value and replacement cost value.
Actual Cash Value vs Replacement Cost Value
Both cash value policies and replacement cost policies cover your belongings from the same dangers, but the way compensation is calculated is different.
For an actual cash value policy, depreciation is taken into account when the insurer’s claims adjuster is investigating the claim. This means that as the value of your items goes down over time, or depreciates, so does the amount of compensation you can receive in a claim. For example, say you purchase a $2,000 watch and insure it under home insurance. Over the years, its value depreciates. By the time the watch is stolen, it was only work $500. When you file a claim at this time, you will receive closer to $500 in compensation for the watch despite what its original value was due to depreciation.
On the other hand, a replacement cost value policy does not account for depreciation. Instead, a replacement cost value policy provides compensation so that you may replace it with an item of similar or identical value. This type of policy is generally more expensive, but it is also more likely to allow you to replace your belongings in total after an incident.
Which Policy is Best?
The type of policy that is best depends on you and your belongings. Keep in mind that there are certain limitations under both policies, as well. Most home insurance policies do not cover damage or loss caused by floods or earthquakes. There is also limited coverage for expensive items such as jewelry, furs, art and electronics. If you have expensive items such as these, you may need additional policy floaters. Policy floaters allow you to fill in the gaps on your personal belongings coverage and insure your high value items more effectively.
Speak with an agent to protect your personal belongings within your home. It is crucial to make sure that your items are protected so that you don’t have to pay for repairs or replacements out of pocket after an accident.